Q1 2022 Terrascend Corp Earnings Call
Okay.
[music].
Good afternoon, ladies and gentlemen, and welcome to the terrorists and Corp, first quarter 2022 financial results Conference call.
Joining us on today's call are Jason Wild Executive Chairman.
Ziad, Ghanem, President and Chief operating Officer.
And Keith staffer Chief Financial Officer.
At this time all lines are in a listen only mode and following the presentation, we will conduct a question and answer session.
If at any time during this call you require immediate assistance. Please press star zero for operator assistance.
As a reminder, this call is being recorded today Thursday May 12, 2022, and I would now like to turn the conference over.
To keep staffer Chief Financial Officer. Please go ahead.
Good afternoon, everyone. Today's presentation includes forward looking statements about the business outlook in the states in which the company operates each.
Each forward looking statement discussed in today's call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears under the heading risk factors in our 10-K that was filed with the securities and exchange <unk>.
Emission and available at Www Dot SEC Gov, and on our website at www dot tariffs and dot com.
The forward looking statements in this presentation speak only as of the original date of this presentation and we undertake no obligation to update or revise any of these statements.
I would now like to turn the call over to Jason.
Good afternoon, everyone and thank you for joining us today.
The strategic measures, we have taken thus far operationally and through M&A have us well positioned to deliver strong growth today.
Today, we are among the leaders in each of our four key markets, Pennsylvania, New Jersey, Maryland, and now Michigan.
Our strategy is to go deep within a number of attractive states and in doing so hold leadership positions in those markets.
This strategy could not be more evident.
New Jersey officially opening for adult use sales on April 21.
Not only the tariffs, but the entire industry.
Today, we have two of the 12 retail locations opened in a market expected to grow to $2 5 billion by 2025.
I believe that by focusing specifically on entering medical only states early we can eat while we dream profitably growing with the market until adult use comes into play.
This was our playbook in New Jersey, and we are following the same steps in Maryland, and Pennsylvania, both of which we expect to move ahead with adult use in the not too distant future.
Speaking of Merrill Lynch, we continue to lay the groundwork for a scaled and vertically integrated business.
We recently announced the acquisition of the Allegheny Medical marijuana Dispensary, and 8000 square foot retail location attractively located within six miles of three states.
During the quarter. We also closed on gauge a leading operator in Michigan, one of the largest and most sophisticated market in the country.
<unk> brings to us Kristine operations, and incredible brand and elevated retail experience and meaningful partnerships with other leading brands with.
With the acquisition now closed integration is well underway.
We are excited about our path forward in Michigan and will look to expand our retail footprint rapidly as evidenced by our recent acquisition of pinnacle and its five dispensaries.
In a very short period of time tariffs then has grown substantially.
Well you have assembled a phenomenal portfolio of assets.
Financially disciplined way, which will enable us to drive the profitable growth that we expect in the future.
Let me take you through our portfolio.
Our retail footprint at the end of the first quarter comprise 26 opened stores across four states and Canada.
With the acquisition of Pinnacle in Michigan, and Alleghany medical in Maryland, as well as the planned openings in Lodi, New Jersey, and several new stores in Michigan.
Our footprint at the end of the year is expected to surpass 40 stores across five states and Canada.
Our cultivation footprint provided provides us with scale capacity in our four core states.
We completed the upgrade and expansion of our Pennsylvania facility, which provides us with availability for further expansion to support future demand.
We also have significant capacity expansions underway in both new Jersey and barrels.
And finally in Michigan, We were just recently approved to open our extraction lab and our monitor to.
Phase III cultivation expansion is planned to become operational mid year.
Both of which will enable us to bring more cultivation and manufacturing in house to support our growth plans and further expand our margins.
Quality and branding remain very important to us.
We strongly believe that these capabilities will win the day and increasingly competitive market environments.
In addition to our high quality owned brands, we have partnerships in place with leading brands that have the same focus including cookies pure beauty and to lead the question.
Our intention is to leverage all of our leading brands and generics across all of our markets.
From a talent perspective, I am very pleased that we have completed the build out of diverse executive team, which includes Ziad Gautam, who joined us during the first quarter and our most recent additions Jodi lampert to head HR and Lynn Kathryn to lead our legal team.
All of the work that we've done in our core markets for the last several years is falling into place now.
The first quarter transition has positioned us to go on to bigger and better things going forward.
New Jersey is now in full swing with adult use sales and.
In Pennsylvania, we continue to cultivate and bring to market a high quality flower, new strains and new products, including our new tapes.
In Maryland expansion is well underway and we will be vertically integrated once alleghany closely shortly.
And in Michigan, we are well positioned with our retail and supply expansions.
Additionally, there are in pricing.
Attractive M&A opportunities for us to deepen our presence in existing markets and expand into new markets.
We are here in this good position because we have been financially disciplined and possess a strong balance sheet without having to rely on our high cost capital options like sale leasebacks.
I would now like to turn the call over to <unk>, who will provide a further review of our business by state.
Thank you, Jason and good evening everyone.
As Jason mentioned, we are successfully executing on our long term growth strategy on all fronts.
We could not be more excited about our leadership position in each of the four key markets in which we currently operate.
Starting with New Jersey.
Adult use sales began on April 21st.
A significant milestone for our company.
Over the last several quarters, we have been preparing for this transfer transformative event working side by side with the CRC to obtain all of the necessity approvals.
Ensure sufficient inventory.
Right level of staffing.
A new adult use packaging.
All to ensure that our patient and customer experience was in place too eager was in place in eager anticipation of this day.
And we were ready.
<unk> was chosen as one of only seven operators authorized to put state and opening the adult use sales.
A testament to the readiness of our team.
Today.
Only 12 dispensaries are open for adult use sales.
Serving the total state population.
The $9 million.
Of the 12 open dispensaries.
Our maplewood in Phillipsburg locations.
I'll choose grand openings.
<unk> will be our third location expected.
Expected to open for patient.
And adult use sales after we finalize the approval process, which is expected shortly.
Our grand openings were a huge success.
Public data suggests that the state generated $1 9 million in sale and completed over 12400 transactions on opening day.
We estimate that our two locations over index, representing 20% of total gross sale that day and 18% of total transaction.
Total transactions that does not even include our branded products sold in other dispensaries.
And we believe that our product market share is even higher.
Our first three weeks of adult use sales confirm.
Firms, our previously disclosed projections that each of our three retail locations have the potential to generate $40 million in revenue annually.
Further fueling fueling our confidence is that we are hitting the sales level without edibles and concentrates.
Two categories that we expect could accounts were up to 40% of sales in our stores.
Being first to market with these in demand products.
We will drive foot traffic to our stores and increase in average basket size.
Our science, our fast start in Maplewood in Phillipsburg speaks to the excellent relationship we have been able to foster with the town.
Leadership and stakeholders.
We are experiencing the same trusting relationship with the town of slowdown.
Eagerly await the opening up of that store.
Additionally, we are insuring.
Yet, we have ample inventory and throughput capacity not only for the increased adult use demand, but equally important to ensure that there is no adverse effect on us.
<unk> ability or experience, where our medical patients.
Initial data indicates that patient wait times has not been impacted and is averaging less than two minutes.
In Q1, our priority was to ensure enough inventory for our stores, while being conservative with respect to supplying the wholesale market.
Not only did we.
Meet the demand of our medical patients and your adult use customers, but we resumed selling our branded products at wholesale at the beginning of Q2, which we expect to continue to do going forward as planned.
Having one of the leading scale cultivation and manufacturing footprints in the state is a key enabler to continue to be a leader in this important market.
We are also excited about two significant incremental growth drivers in new Jersey.
Our recent approval of hydrocarbon extraction.
Our exclusive partnership with cookies.
With risk.
With respect hydrocarbon extracted products, we were the first operator to launch concentrate with the introduction of our lives resin date last Saturday in New Jersey.
This is a significant win for us.
Concentrate represent up to 20% of sales in other markets and had not been available in New Jersey.
These products and form factors are often preferred by the Kansas by the candidates consort and have locked and have larger market share among the more sophisticated markets like California and Michigan.
Additionally, we soon planned to introduce cookies branded products to the market through our cookies corners, a store within a store concept.
In each of our retail dispensaries in the state.
Subject to CRC approval.
Needless to say, we expect hydrocarbon extracted product.
And the cookies brain to drive more traffic and loyalty to our dispensaries.
Finally, we recently signed a lease for a new facility will which will enable us to expand up to the 150000 square foot canopy limit overtime.
With this scale, we expect to continue to be both a retail and wholesale leader in New Jersey.
We believe the new Jersey adult use lunch.
Sets the stage for other states in the northeast to similarly, a flu approved adult use sales over the next 12 to 24 months most.
Most notably, Pennsylvania, and Maryland, where we also have established leadership positions.
Moving next to Pennsylvania.
I am pleased with our continued progress and execution. Despite the statewide they pre calls during the first quarter.
The impact of do they pre call was significant to both our retail and wholesale business.
With Q1 behind US we expect the impact of the three call to have minimal impact in Q2.
Due to our fast action to replace the recalled product with new fully compliant ones.
Today, we are able to produce the same volume as we did prior to the recall across four categories and 20 to 30 strained within each.
Thus far <unk>.
<unk> have reacted positively to these new product in our stores and we are seeing the same at wholesale.
Our facility in innovation in Pennsylvania is complete.
Pennsylvania opened the genetics the genetics window on December 1st for 30 days and hence we believe we now have one of the largest and most diverse diverse genetics libraries in the states.
We initially introduced limited genetics through our stores in Q1.
The velocity of sell through and consumer feedback has been excellent.
We can't wait to see the reaction at wholesale now that we are harvesting larger quantities of product sell through.
From a retail perspective, our six stores in Q1 performed in line with expectations outside of the deep impact.
At wholesale we have reached near full penetration again.
I'll now focus on driving larger order size and frequency driven by the new strains and products that we initially launch in our own locations.
The action, we took in the middle of last year resulted in US now selling the highest quality flower we ever has.
And combined with what we believe to be the best Genetics Library and brands in the states, we are well positioned in the near and long term as the state moves towards adult use.
Staying in the northeast, Maryland is another limited license market in which we are an early mover.
Maryland is a $600 million medical market with a population of roughly $6 million.
Adult use is expected to be on the ballot in November .
With a roll out possible by mid 2023.
We are expanding capacity and adding dispensaries, which will enable enable us to.
To capitalize on growing demand.
Since the closing of the H M. S acquisition in 'twenty, 'twenty, one, which provided us with cultivation and processing capability we.
We have made significant progress in expanding our wholesale distribution points with our branded products.
We now have 60% of market distribution points at wholesale as compared to 25% at the time of the acquisition.
In Maryland, our strategy remains consistent with the other states in which we operate.
Become a vertically integrated leader and the pre adult use market.
To that end and.
And subsequent to the first quarter, and we acquired Alleghany medical and 8000 square foot high performing dispensary in Cumberland.
Strategically located in close proximity to the West, Virginia, and Pennsylvania borders.
We plan to rebrand to rebrand as dispensary has the epithelium.
Award, winning retail dispensary concept.
We will also increase the penetration of dislocation with denizens high quality branded product.
We will continue to pursue further retail expansion through M&A up to the four dispensary limit to soap to fully prepare ourselves for the potential future adult use demand.
In Hagerstown in Hagerstown, the build out of our 150000 plus square foot facility is progressing on schedule and on budget.
Upon completion, we will have additional cultivation and manufacturing capacity.
This will allow us to launch additional brands and form factors into the market.
The extraction lab should be it should be turned on this quarter was cultivation operational in Q3.
Now for a discussion of our newest market Michigan.
We closed on the gauge acquisition late in the quarter.
We are very excited to have added a leading position in Michigan.
Third largest U S market.
Estimated at approximately $2 billion in sales annually.
We were fortunate to be able to enter the Michigan market was the highly recognizable and sought after gauge brand and its exclude its exclusive library of genetics as well as exclusive licensing partnership with cookies.
Fewer beauties and Khalifa cush.
Integration is well underway and ahead of schedule schedule.
Additionally, progress on revenue growth and margin expansion drivers continues according to plan.
We now have 12 gauge or cookies dispensaries in Michigan and one in Canada.
With seven new locations planned to open over the coming months.
Furthermore, upon closing of the Pinnacle acquisition we.
We will add five more dispensaries.
Capitalizing on gauge has strong brand recognition and retail experience.
Our plan is to rebrand these dispensaries under the gauge or cookies banner.
We will begin supplying the stores with our sought after engage in cookies branded product.
We expect our brands to achieve the same penetration level as our current stores.
These plans along with the additional potential M&A.
Put us on track to end the year with at least 125 dispensaries in the state.
We are pleased with the ongoing gross margin trajectory in X and expect further improvement from the just open extraction lab.
Harrison logistics and packaging facility.
And the monitor two cultivation expansion once completed.
Since joining person in January I guess.
Had the chance to do a full comprehensive review of the company's strength and opportunities without ignoring the exhaust exogenous challenges that all in I suppose are facing in these early days of industry growth.
We had a U S. Matt there is wide open for us, allowing us to be selective with the increasing pace of opportunities that are constantly knocking at our door.
The multiples have been trending down considerably and we will continue to make financially disciplined decision.
In addition to all this we had a meaningful backing from Jason and J J W. Asset management that continues to help drive our strategy not only from a financial perspective, but also continuing to present attractive opportunities to Tyson.
Especially in these more trying times in the capital markets.
To summarize we have put together a seasoned and experienced leadership team.
The hard decisions have been made over the last year.
Our investments in core infrastructure are in place in our four key markets.
And we are ready to go.
I would like now I would like to now turn the call over to Keith to provide a financial update.
Thank you Ziad and good evening everyone.
The results that I'll be going over today have already been filed on both SEDAR and Edgar I'd.
I'd also like to remind everyone that effective with our previous 'twenty 'twenty. One 10-K filing in March we became a U S filer with the SEC and report our results in accordance with U S. GAAP.
All of the results that I will reference today are stated in U S dollars.
Net sales for the first quarter totaled $49 7 million or <unk>.
Decline of 7% year over year and up 1% percent sequentially.
The results are mainly related to the temporary impact of the vape recall on our Pennsylvania business.
Combined with our continued accumulation of inventory in new Jersey versus selling wholesale in preparation for adult use sales.
Our Canada business also experienced a soft quarter, both sequentially and year over year.
The declines were partially offset by.
The three weeks of revenue contribution from the gauge acquisition.
Regarding sales by channel wholesale revenue for the quarter was 24 million a decline of 2% sequentially.
And by the P E vapor recall the continued build of inventory in New Jersey and softness in Canada.
Partially offset by the addition of gauge.
Retail revenue for the quarter was $25 7 million, an increase of 4% sequentially driven by the addition of gauge and partially offset by the rate impact in pets, and our six Pennsylvania stores.
New Jersey, and California retail sales were stable sequentially and this was pre adult use for new Jersey.
Gross margin for the quarter was 35% as compared to 42, 3% in the previous quarter.
Adjusted gross margin for the quarter, excluding onetime impacts.
Which includes reserves for the P E vapor recall in Q1.
Was 38, 4% as compared to 49, 8% in the previous quarter.
The sequential margin compression was driven by the under absorption impact of lower volume.
Volumes related to the vape recall in P. A.
Want loaded cost in New Jersey ahead of adult use sales.
And an unfavorable mix from the addition of gauge for part of the quarter.
We expect for Q1 to be a low point for gross margin as we have already begun to recover from the temporary impact of the bakery call and as our New Jersey adult use business begins to accelerate in Q2, and then more fully in the back half of the year.
Additionally, we continue to execute on our gross margin expansion plans in Michigan.
Which include the opening of our extraction lab, the opening of our Harrison logistics and packaging facility and the upcoming completion of the cultivation expansion and monitor.
G&A expenses, excluding stock based compensation were up $2.2 million versus the previous quarter, including gauge <unk>.
As a percentage of revenue SG&A increased to 38, 7% in Q1 from 34, 5% in Q4 the.
The increase as a percentage of revenue was impacted by flat revenue combined with Frontloaded spending increases in New Jersey, and the addition of gauge for part of the quarter.
Adjusted EBITDA for the quarter was $3 3 million versus $11 9 million in the previous quarter.
This decline was driven by the gross margin compression in Pennsylvania, and Frontloaded costs in New Jersey.
As well as the decision to accumulate inventory in the state and preparation for adult use sales.
Similar to what I mentioned.
About gross margin earlier, we expect for Q1 to represent a low point for adjusted EBITDA and adjusted EBITDA margin as we recover from the temporary effects of the bakery call in Pennsylvania as as our New Jersey adult use business continues to ramp and as the margin expansion activities and Michigan progress.
Turning to the balance sheet, we ended the quarter with a healthy cash balance of $88 4 million versus 79.6 million at the end of December .
This healthy cash position will enable us to continue to invest in the business both organically and through M&A.
During the quarter, we used $18 8 million in cash from operations, mainly driven by an increase in working capital as we continue to prepare for adult use in new Jersey, as well as $8 million of interest payments.
We expect to convert the working capital build to cash over the coming weeks and months.
We received 24 million in proceeds from warrants and options during the quarter.
We also paid $3 3 million to terminate our lease in Frederick Maryland, as we prepare for the transition to our new Hagerstown facility.
And we made the final scheduled earn out payment of $7 million for our state flower business.
Finally, capex spending during the quarter was 4 million mostly related to the ongoing work at our Hagerstown facilities.
In conclusion, we continue to execute on our strategic priorities and invest for future growth.
We expect substantial revenue growth in Q2 fueled by the beginning of New Jersey adult use sales the continued rebound in Pennsylvania.
As well as a full quarter of gauge.
As a result of these key revenue drivers, we expect gross profit margins and adjusted EBITDA margins to rebound in the second quarter, and then tomorrow only accelerate into the back half of the year further fueled by SG&A leverage from continued disciplined management of spending.
This concludes our prepared remarks, I'd now like to ask the operator to open the call for questions.
Thank you Sir ladies.
Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question. Please press star followed by the number one on your telephone keypad and if he would like to withdraw your question. Please press star followed by the number killed.
Please standby for your first question.
Yeah.
Your first question comes from Andrew Bond of Jefferies. Please go ahead.
Hi, Good evening, Andrew Bond on the line for Owen Bennett, Thanks for taking our questions.
Sure.
So first and in New Jersey I appreciate your commentary around being first to market with vape as well as resuming those wholesale operations at the beginning of <unk>. So I think everybody on the call is familiar.
Product format variety in product selection variety is quite limited in the market currently for rec customers. So.
Two part question first curious on your thoughts in general around the overall market product variety and how that trends over time and then secondly, do you think your new Jersey operations are better positioned on product variety versus peers and if so how does how or to what extent do you think that benefits your retail and wholesale operations. Thank you.
Sure Yes.
I'll take that question sure Hi, Andrew Thanks for the question.
From a for the first part of the question the overall market.
The performance.
And.
Also from a product perspective.
We're very excited about that.
The start out of the gate and the New Jersey as I mentioned in my remarks, we are even more confident about the numbers that we shared in the past.
Currently.
The limited.
Hortman or the limited menu that exists was driven by multiple factors. Initially we wanted to collect data to see how can we protect the patients inventory.
Second we wanted to make sure that.
The new labeling and the new product.
Label and serialization the complexity that came in within days of the launch made the full menu more complex.
Currently we have multiple strains of flower on our menu we have multiple strains of vape on our menu. We have limited edible assortments to grow expansion exponentially. This week and then we have.
Introduced the concentrates.
We expect in the next.
Few days two weeks to have a full menu in our stores and we believe that the diversity of the products will give us an advantage.
Both from a wholesale perspective, and a retail perspective.
The product has been extremely popular around.
With our patients and we have been able to rotate multiples trains on a daily basis and the reaction has been very positive.
Perfect very helpful colors YOD. Thank you and then secondly, just on the newly signed lease for cultivation in New Jersey give.
Given the current state of the market and also some wholesale.
Opportunities coming online coming into next year with with new stores licensed I'd assume you want that facility up and running as soon as possible. So can you just walk us through what you can share around the timing of the ramping of that.
Facility from from plants in the ground to initial harvest. Thank you.
Yeah, Andrew I would say I would say two phases for our New Jersey and the first phase is really we strongly believe and the data shows that new Jersey is going to be a demand market and we will continue to plan very strategically on how we distribute our products between our stores and wholesale and how.
Now what percentage, we carry in our stores from a.
Third party versus our own brand in order to offer our patients and our customers.
<unk> products. So that's phase one and we feel pretty good that we have a good plan for this.
As far as expanding our cultivation.
Footprint, we plan to fully introduce.
More cultivation space and we will in a planned way expand up to the 150000 square footage that we are licensed for.
We will start the project has already started in that facility and then we will share more of the details.
The completion of the project and the bringing online of.
Extra cultivation product.
Great. Thanks, very much looking forward to following along with the rest of the year.
Okay.
Yeah.
Okay.
Your next question comes from Mike Kendrick tie of ATB capital markets. Please go ahead.
Thank you and good evening.
Just I'm wondering if you and the team could help us better understand will perhaps Keith if you could break out the moving parts on the gross margin compression in quarter.
There are a number of moving parts, but just the quantum of that.
<unk> is obviously, a big negative surprise I realize that we're through it but I, certainly think being able to kind of handicap or tease out.
The the various pieces of it might be might be instructive for the coal as people try and handicap.
The recovery profile looking to the second quarter.
Yeah sure so I'll take that Jason.
Sure Yeah, so I I Kendrick yet so.
For sure it was.
A big impact and a variety of different factors and.
The first and foremost and you heard it multiple times in our prepared remarks is really the vape recall.
That by far has the largest impact on our.
On our gross margins.
We really the volume loss there can.
Combined with just the under absorption at that facility.
I am really really hit us in Q1 and.
And like we talked to we feel confident as we look forward.
That's the trough and it's going to pick up from there. So that's the first point.
Second point is around is around Michigan, and its a little bit distorted because we only have gauge and around numbers for 22 days.
But it.
Gage was dilutive to our margin in the quarter.
A full quarter in Q2 is going to be more representative and and so again, we believe that that.
That dilutive impact in the quarter, well will bounce back next quarter, the third that we didn't that.
We didn't highlight in the prepared remarks, but what.
When I explain as with Maryland.
We're in the process of transitioning out of the existing smaller facility and into the new expanded Hagerstown facility in the coming weeks and so we've been scaling down the production and the output from Frederick in order to sort of had a hedge against.
Just that disruption of moving live plants, and and just make the process more manageable so that had a.
That had a dilutive impact on the quarter as well and then last but not least is new Jersey like we mentioned several times really we have some costs upfront there that we've been incurring and incurred even more so in Q1 and the run up to two.
Two adult use here in April so really those are the four moving parts P. A by far the largest.
And I kind of went in descending order of impact.
And the explanation there.
Okay.
Thank you.
Recall that if I'm reading your comments correctly was well in excess although at least half of that the bounds often quarter without the effects actualization, yes.
Yes, Yeah, and again just wanted to just want to emphasize a I haven't been clear enough, which is again, we see Q1 being the trough here.
Like we said in our prepared remarks, we expect a rebound in Q2 and then for <unk>.
Inflection from there in the back half of the year.
As we build into new Jersey adult use and as Pennsylvania continues to recover the volumes and.
And as gauge.
The margin expansion activities engaged continue.
Great. Thanks, Keith I just wanted one more quick one for me just with respect to New Jersey, certainly the understanding I think of expectations ahead of adult use for that.
The likes of yourselves and wanted to your competitors.
We're very well positioned and if anything we're setting inventory Rex and chomping at the best to get at the market.
And yes and culture. It appears that you were looking to preserve inventory of all the build inventory for your own install it. So could you just help us reconcile how that evolved I realize again lot of moving parts.
Getting bounced around but any insight there would be useful as well not impossible on thank you.
Yeah, I can take this one Keith Kendrick.
In our case.
We are not trying to reserve inventory for our stores the inventory that we have like we like the way we've promised before it's still in the same position. We had what has been the challenge for us and for many others as the manpower the new labeling.
And the Ah.
Transition of those products to adult packaging into the stores.
As time has gone we are that much closer to have no restriction no handcuffs around having a full menu and full launch of all those skus and product in our stores. So just want to confirm it is not an inventory and inventory.
Finish as a matter of fact, we have.
Resumed our wholesale.
At the beginning of the quarter.
Four four skus that were easy to label and easy to produce so inventory continues to be strong at is the logistics of getting better.
Great. Thanks, a lot.
Yeah, I would just add to that we did though.
We did hold back product as we got to the end of <unk>.
Of Q1.
And originally we thought we were going to be approved I think it was on March 24th and then that was delayed and in the remaining days of that quarter. We realized that there was a good chance that we would be.
One of not everybody getting approved.
For for adult use so.
We decided to pull back on making our wholesale sales at the end of at the end of the.
Q1.
The other reason that we did that was because we had the feeling that they were going to go from giving that 30 day notice period, which was what we expected on March 24, two in the beginning of April for the day to day rescheduled.
The boat that it might be a lot quicker than 30 days.
Which would give us less time to acquire wholesale products from others, and we just put a little bit more of a.
A rush on all of us to have enough product to stock our stores. So the.
There was a hold back.
Towards the end of the quarter, Ed we were it was a it was intentional.
And we felt like we had an even better chance of.
Yeah.
Retaining all of that product and selling it all through our stores, especially if not everybody was going to be approved.
To go back.
Thanks, guys I appreciate that.
Okay.
Your next question comes from Andrew <unk> of Stifel G. M. P. Please go ahead.
Hi, good evening, thanks for taking my questions.
Maybe just first on New Jersey, you reiterated that you believe your stores can can do a $40 million annually.
In sales.
Which is a pretty impressive number.
And also mentioned that you.
Due to your positioning.
You accounted for 20% of total sales on the first day.
And that that number seems to be significantly higher than the $40 million annually.
So I'm just wondering is that $40 million annually.
Do you see that as a as a comfortable number you know a long term kind of target when things settle out.
Or.
And do you see some upside to that.
Yeah, I mean, we definitely see upside to it I could tell you that.
One of the things that we've been discussing over the last couple of weeks is.
When we were looking at what we saw it we thought we could do at least 40 million per store.
But we had been throwing around some math around trying to figure out how much. These stores should be if there was you know.
A whole lot of demand in excess of $40 million and we originally.
Where St James maybe $50 million to $60 million per store.
And what we saw.
What we've seen over the last few weeks is that we actually think that.
All of our dispensaries, even including Philipsburg, which are smaller.
The ability to drive.
You know more or less 70 plus million dollars in sales assuming.
Assuming that assuming that the demand is there.
So I'm not sure that that was the answer to your question, but we definitely feel more confident than ever that we should be hitting.
$40 million.
Run rates.
Sustaining $40 million run rates in the <unk>.
In the coming months, but we actually have expanded.
Our view on what the stores.
And do with demand thats in excess of that because as you see it's based upon those first the first day stats that were that were put out by the state.
We were we were already.
Pretty much there.
Maybe just to jump in and just add a clarification there Andrew it im not sure that the day. One sales are representative of where you can just take that times 365, I think that.
The day, one sales for the whole state were.
Pent up demand.
Some degree, but yeah. So.
That addresses your question as well.
No. That's that's perfect then the qualification is definitely well understood.
Yes.
A follow up to that.
And maybe transitioning towards the commentary around around M&A.
Discussed around acquiring more stores in Maryland in the past entering new states like Massachusetts.
And and today you discussed the.
The valuations are decreasing.
Just wondering on an if you could give a little bit more color on.
Kind of what you're seeing what's the pipeline looking like.
Is it something.
At what stage of of discussions.
That's you're at and considering where where equities are trading.
Would you see this as more of of cash.
Cash deals or a combination of cash and equity.
You know unchanged from from in the past.
Sure.
I'll take that so there's definitely been an increase in.
Reach out to us about.
Deals that were done.
<unk> become available.
We think.
That there are going to be some amazing opportunities we have been.
Thus far we have been really focused on.
And really happy with the opportunities that we that we have in the states, where we operate so we joked internally with the with the M&A team that the best deals that you get are the deals you get when you don't need deals and that's definitely the position that we are that we see.
Feel like we're in.
I wouldn't say that the opportunities at this point that we're seeing are like.
We'd be crazy to get out to turn them down.
But we think we're going to get to that point.
In the coming months there are based upon our wide open map and the ability for us to to add <unk>.
States Opportunistically and.
Where it could be you know, we don't need to necessarily enter this state or that state theres. Just so many attractive single state operators in different states and the fact that we can be opportunistic and really wait for the so the ones that are that we'd be crazy to turn down.
What we said is going to happen in the coming months, we are working on as we've mentioned in the past we are working on more acquisitions within the states that we operate in and those are similar.
Similar terms to say.
The political deal in Michigan in the Allegheny deal in Maryland.
Those are already super attractive, especially based upon the fact that we've already got scale in those places.
But in terms of entering some additional states, we think that MBA in the coming months, we're going to be able to really.
B Super opportunistic and not to throw it to many cliches around but that we can that we can really wait for wafer or pitch, we've got the balance sheet to be able to use cash.
As a component we also have the ability we have more.
Capacity under our debt facility that we could that we could deploy in order to.
Used cash in the transaction, but the fact is.
So many of these deals are in all and all of these private assets has gone down as much if not more than the public assets.
That even if we use stock and don't get me wrong I think.
The stock is.
<unk>.
Much lower than it than it should be here right now, but even if we use stock.
These deals would be amazingly accretive because we'd be buying assets for much much lower multiples.
Thank you for that very fulsome answer I'll get back in the queue.
Sure.
Your next question comes from Vivien <unk> of Cowen and company. Please go ahead.
Hi, Good morning. This is actually Victor MA on for <unk>. Thank you for taking the question.
So just to kind of.
As more of an industry wide question, but commentary out of California suggest that price deflation hasnt abated and our industry conversations would suggest that that in part was.
It was a function of excess planting in 2021 after the wildfires in 2020.
So to the extent that's true do you have an early read on what the planned cultivation is.
For 2022.
Relative to last year.
Ziad, you want to take that.
Sure Victor I, just wanted make sure yes, sure Victor I would just want to make sure I understand the question are you specifically asking about California. What are you asking in general in the market.
Specifically about California, given that it has.
Outsized impact on industry pricing.
Sure. Yes, we have seen we have said we have seen and felt that impact. We continue to work very closely with the team in California to really address the issue, we still are seeing and maintaining a premium price to our specialty and quality flower from state.
Lower at the same time.
The team proactively have realized that challenge.
And have <unk>.
Started internal initiatives to reduce the cost per pound of.
Reduction the cost to produce it bound by almost $200. So with those two combined together we are combating.
That weighs effectively.
Got it thank you for the color.
Your next question comes from Eric Dey Laurier of Craig Hallum Capital. Please go ahead.
Thank you for taking my questions.
First can you just talk about the pricing dynamics that youre seeing in Michigan and that's obviously another.
No challenge state here.
And then how gauges pricing is kind of holding up and then sort of how that's informing your premium strategy in your other core markets. Thanks.
Sure I'd be happy to talk to take this Jason I can start.
Yes.
Watching very closely.
The pricing situation in Michigan, with our genetics and with our brands both the gauge brand and cookies brand, we continue to see our premium price.
Exist in the market.
And in Michigan, we have held back.
By design kept our engage product in our stores and our cookies product in our store moving forward going forward as we see the number of dispensaries increase as we see the pricing pressure increase we will start.
Very thoughtfully addressing some of the non vertical dispensaries in the state that our net associated directly with the cultivation, we will start a wholesale.
Outreach in order to put strategically our brands and our.
Accomplish bigger penetration would that premium price those dispensaries in a way that does not cannibalize in the same MSA any of our stores.
So pricing, we're watching very carefully expanding and using the penetration or the highest.
The higher number of stores and leveraging this to our advantage is something we just started and we'll keep an eye on that dynamic to make sure. Our premium continue premium product continue to offer us a premium price.
Eric I appreciate the question.
Yeah, Yeah, Yeah, no that's great.
You can.
You can see two specific.
Dollar amounts for assays or percentage premiums you know, obviously that'd be helpful for anyone listening, but I understand that you don't want to get into that detail.
So Mike my.
And my second question here.
Is just on New Jersey. So I appreciate the color that you gave on one of the earlier questions just kind of around the timing.
Timing in phases of expansion.
My question is just a clarifying one.
Do you plan on transitioning out of your occurrence.
Production location.
You are in Maryland for the second cultivation facility or.
Should we think of that as you know as you guys are eventually having two cultivation facilities in New Jersey.
Yes, I can I can take this.
Go ahead, Jason there have you start I can't I can't I was just going to say New Jersey changed the law about a year ago, where you could have two different cultivation locations, Maryland does not allow through different.
<unk> location, that's why we need to close one to be able to open up the other one but new Jersey.
It doesn't require a one location and the plan is absolutely to cheap our current location and have.
Everything.
The location be additive.
Okay, great. So I suppose less less disruption on the horizon in New Jersey as well that's great. Thank you for the color.
Your next question comes from Matt Mcginley of Needham. Please go ahead.
Thank you.
First question is on the retail and wholesale segments split.
I understand gauge as being a predominantly retail business at present and it looked like it added about $11 million in revenue in the first quarter that the factors that you cited with holding inventory in new Jersey and that soft made sales in Ta I think primarily hurt the wholesale revenue in the first quarter, but when we look at your segment splits they were about within $1 million of one another what you reported in the fourth.
Quarter, So I'm not sure what else dropped off in retail if the 11 million engage revenue was still mostly revenue or am I just off on that assumption is that is that a dated assumption of gauges.
More more equally weighted between wholesale and retail versus what we would've seen a few quarters back.
Joe I'll take that.
Yes, sure Hey, Matt.
Yes, so again, the 22 day period sort of distorts things because.
It happens to have some more wholesale sales in it for gauge.
And so when you take a full quarter or split it's more representative of what your what youre thinking and correctly thinking.
But that short period that gauge gets into our numbers does have wholesale sales in it.
Yes.
Can you tell me what the rough split is between wholesale retail at this point.
Yeah, it's a little bit it's a little bit more skewed towards towards wholesale just given that that that's lumpy versus 22 days of retail is you know pretty much straight line in the quarter. So it's a little bit more skewed towards wholesale.
Yes that makes sense and my second question is on the inventory. Your overall inventory went up by about 22 million bucks quarter over quarter, but it looks like the inventory that gauge had an early early march which wouldn't be the same amount that it would have at the end of the quarter was around $26 million.
You made the comments that you've built a lot of inventory in New Jersey, but I guess, you can't we can't see that within our numbers because it looks like gauge is a pretty substantial part of that so I guess can you help us understand if you're at $64 million of inventory how much of that is actually new Jersey versus these other states and then how should we think about that inventory when you report the SEC.
Quarter will the will the initial new Jersey channel fill shipments reduce your inventory levels or will you be rebuilding around the rate of depletion in those dollars will stay relatively static going forward.
Yeah, good questions, Matt so.
The first the first thing that to understand is there.
Michigan opening balance so well first of all I'll start out by saying if you take those three markets which are.
By far the where the inventory is it's it's split roughly evenly a third a third a third between the between the three markets and then there is some inventory in Canada, but.
It's really Pennsylvania, New Jersey, Michigan also keep in mind that there's a step up in fair value and the inventory number for for gauge for Michigan.
So that's a pretty notable impact of several million dollars.
And then.
Yeah looking forward we expect.
A pretty significant sell through of course in the New Jersey balanced so that we build up over the past few months and.
Even longer than that so, but new Jersey will come down, Pennsylvania will come down.
And Michigan, well will be more or less.
More or less steady state from from what Youre seeing at the end of March.
Okay very good thank you.
Yeah.
Your next question comes from Glenn Mattson of Ladenburg. Please go ahead.
Hi, Thanks, Yeah, I missed part of the Z Ed's comments when he spoke to Pennsylvania, but I was curious just.
If there's a way to possibly if you could kind of like exclude the vape issue.
You know last quarter, you talked about.
In December achieved the top three position in the state again and all the benefits are.
That youre starting to see from the from the cultivation rebuild if you can kind of exclude the vape issue just a better sense of does.
Did that continue into Q1, and just generally our thoughts on your market position in Pennsylvania.
Yeah. Thanks, Glenn.
I'll take a minute or two just to recap, Pennsylvania, Pennsylvania is super important it's a super important state for us and we really believe today and I have a lot of confidence more than ever that that it will be a big winner for us for years to come so I'll share with you why I am so confident with as much detail as I can.
Can was actually facts and trends over few quarters to get a better color on it Q3 and Q4 of 2021.
We had <unk> available and the flower was going and being impacted by the facility construction and renovation.
So we anchored our sales and wholesale around the non flower.
Skus in December as I said, we replenished our library with outstanding genetics.
Q1 came in.
We lost weight during the recall and we showed increased flower sale in a down market increasing flowers sale with even the small batches that we put of the new genetics, our stores was very exciting to us today and for Q2 2022.
We have 50% of our new flower that are being produced or new genetics.
And we just got falls a production so starting in Q3 of 2022 and for the remaining of the year. We will have full production of new strains with no all genetics from the flower perspective, and we have full data production of more than 30 strains and the four different vape category.
<unk>.
So in the last two to three weeks, we have seen vape numbers recovering where we sold in each week around 12000 units per week, a vape from almost nothing after the recall and we expect to get well over the 15000 units per month that.
We had prior to the recall per.
Per week.
Or week correct.
Okay, Great. That's helpful color. Thank you.
And then just a question on the Michigan on the when you.
We're able to turn on the.
The cultivation in the other facilities.
Processing facility.
What.
That plus market dynamics, what do you expect the Michigan market kind of margins to settle in at maybe if you want to give specific numbers maybe versus current.
Normal company margins in that kind of thing would be great.
Well, let me take that.
Sure. Please okay. So.
So yeah, we are.
So we've been talking about this for a while and now it's finally coming to life, where we were going to have the capability to extract and produce our own distillate until pillar, one vape carts and other manufactured products and so that's going to be a huge margin driver and then soon.
Soon the cultivation expansion is going to become a reality here.
And and we continue to believe in and see through our projections that those that's going to bring our costs down and Michigan.
Yes, we are feeling some pricing pressure, but ziad outline how we're how we're dealing with that.
With the premium brands and premium pricing levels, and we expect to see margins like we described in the past where we can we can run the business in Michigan in and are.
In the 40 45 and that type of range.
In the future and theres going to be a glide path to get there as we as we go through the months of this year, but that's our that's what we fully expect.
And N C coming to fruition.
Oh, great. Thanks, guys. That's it for me.
Yeah, and I would just add to that.
Our extraction and I think we mentioned that in the script, but our extraction lab was finally approved I believe yesterday or the day before.
So that had been played that had been expected for a while that's been delayed also.
Our packaging.
And logistics facility.
Harrison was also approved in the last in the last few weeks there should be.
Additive to margins going forward and then when we update the new flower come on from.
Finishing up the facility in the middle of the year or the Operationalization of it in the middle of the year that will further drive.
Better margins, we're also taking advantage of.
At our retail stores.
So taking advantage of the fact that all the third party product that we sell.
We're buying it better than we did.
In prior quarters.
Your next question comes from Noel Atkinson of Clarus Securities. Please go ahead.
Hi, good evening and thanks for taking my questions Tonight.
First off just again, a little bit on Pennsylvania.
Can you talk a little bit about.
Kennedy utilization in Pennsylvania in sort of Q1 and now versus what you were seeing in Q4, and then also as a follow on what are you seeing for for flower margin.
Overall in the state for trends.
Sure.
Yes, I can.
Ill start so in.
In Q1 versus Q4, what has changed from a production perspective is the mix of the old genetics versus the new genetics, we started.
Planting at the beginning of Q1, we went through the nine week cycle of cultivation.
The last call we shared a few.
Fewer strains and smaller.
The poundage as we put out in how we tested them in all of our stores today.
We have.
We are producing half our cultivation with new genetics.
Testing from dose genetics has been.
Stream the exciting we just look at the desk.
Around 110 pounds that Kim and from this new strain and we see we saw THC level at 30 twos in 29, 28 and 27.
<unk>, so the biggest change and and and and.
And production in cultivation and that facility has been the mix of genetics.
We have spent and adjusted the facility and reconstructed and renovated the facility where as we are.
<unk> grow the demand in advance towards adult shoes, we will be able to exponentially increase the cultivation and take full advantage of the high demand that we are convinced.
We'll be we'll be there.
And there would be more demand than supply that exists at that point in the state.
Okay. Thanks, and then just as a second question here. So I realize you'll you are selling or we'll be selling third party products as well as your own in your new Jersey stores, but.
If you have all three new Jersey stores up and running and operating to expectations or beyond.
What is your.
Inventory availability out of your existing facility.
Serve those high end of your expectations or do you have to wait to get the additional facility online to get to those numbers.
Yeah, as I mentioned from a new Jersey perspective, it will be a.
The remaining of the year will be a demand model for us.
Depending on what ratio of third party two hour to two hour on brands in our stores well determine what we will do in wholesale in how we mix it but we have also model, even if we put 100% of our own.
And our stores will still have and we already have started.
Supplying wholesale.
Two other peers in the market.
And independently from that mix, yes, the wholesale availability will allow us to reach our upper XP.
Expectation.
Okay. Thank you very much.
Yes.
Your next question comes from Andrew sample of Echelon. Please go ahead.
Hi, there good evening.
Just wanted to dig into the details behind the Pennsylvania retail store performance in the quarter a little bit more.
Just trying to piece together how.
The retail business as a whole.
Performed.
Spoke to new Jersey, being roughly flat sequentially. So.
Just wanted to get a better understanding maybe what were some of the headwinds faced on the retail side and I know you've spoken to the base impact.
Multi from the old sales standpoint, but could you also walk us through how that may have impacted <unk>.
Core performance as well.
Yes from a retail perspective, Andrew we are we are where we're happy we're satisfied with the performance of our retail stores collectively we haven't seen any pressure on the retail store on the retail stores.
In part.
And in Q1, we have.
I've mentioned that we've seen an increase in our flour sale. We have released some of those flowers our store our stores initially, but our wholesale team has done a good job quickly acquiring.
The replacement for the base that we have lost and the combination of both has allowed us to.
Not see any pressure on the retail business in Pennsylvania.
We expect going forward.
With.
The availability of our new stream, our new flower and the new product from all the way.
That I described that our own brand will increase we already started seeing that reversal from that 70% to 80% mix to get closer to 50 50, and that's something we are extremely excited with both from the bank.
Its size from the stickiness of the patients.
But also from gross margin.
And then maybe just to add there.
Did see an impact at retail from the vape recall, so I think everything that was describing was sort of setting aside that that specific impact is temporary and and overall, we see that coming back.
Understood.
And then could you maybe just speak to how pricing.
In the Pennsylvania markets, given the step up in quality you've seen on <unk>.
Production output coming out of your facility specifically on the dried flower side.
Yeah, Andrew with the the new genetics.
The new products into new way we are.
We're seeing the pricing holding for us in Pennsylvania.
Great. Thank you.
Your next question comes from Howard Penney of <unk>. Please go ahead.
Okay.
Mr. <unk>. Your line is open for questions. Please go ahead, sorry that was sorry that was me on mute I apologize I was curious of the thought.
What I heard you say in Michigan, you might be converting your stores potentially converting your stores to either cookies or engage.
<unk>.
I'm wondering how the capital allocation decisions go and how you decide one brand versus the other and I'm asking this question under the assumption that you have to pay some sort of royalty fee.
And I have a second question.
Sure I'll take that.
Yes Howard.
You're asking about Michigan.
I didn't hear the question Yeah, I thought maybe I didn't hear it properly, but I thought I heard you say you were thinking of converting the clinical stores through either cookies or engage brand that did I.
Yes.
I didn't hear that yes, yes. So you are asking about the pinnacle's, yes, yes after closing as we learn.
The pinnacle.
Our business and as we dive deeper into the segment.
<unk>.
Uh huh.
The customers end.
And they're all dispensaries.
Made the decision to rebrand the stores, we will have the strains in the products from both gauge.
And cookies are from.
From a.
Rebranding perspectives.
We are prepared were budgeted.
For this but we will run them for a few months before we make that decision.
So the return on capital is the same whether you opened one or the other there's no difference.
Yes.
Okay.
For one or the other.
That is correct and then yes.
Okay Awesome. Thank you and then I think just based on your commentary on New Jersey throughout the call. It seems like New Jersey, the state would make it not too burdensome to expand the menu.
And there's not a lot of regulatory hurdles to go through to bring in new products just want to confirm that.
Given the state of the history of the state that they're not going to burden you with a lot of hurdles you have to jump through to extend your menu and bring on new products.
Yes, Howard that's accurate the CRC has been extremely collaborative on on bringing any new product. We saw this with our.
Concentrates and that's why we were able to bring dose quick.
Quickly to the market and launched a.
Yes that category on a on Saturday.
So we were seeing the same reaction, we expect the same ease and expanding and bringing in new products.
Perfect. Thank you so much.
Ladies and gentlemen at this time I would like to turn the conference back to Mr. Jason Wild for closing remarks. Please go ahead Sir.
Thank you everybody for joining us here today.
Look forward to reporting.
In the not too distant future reporting the results of our.
Our Q2.
As we've mentioned multiple times, there will be substantial progress in Q2 and even more so.
In the second half of the year. So thank you all so much for being on the call here today, and we look forward to speaking to you soon.
Ladies and gentlemen, this does conclude your conference call for today, we would like to thank you for participating and ask that you. Please disconnect your lines.
Okay.
[music].
Mhm.